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Further judicial consideration of the “reflective loss” principle relevant to shareholder claims

  • Legal Development 29 September 2021 29 September 2021
  • UK & Europe

  • Insurance & Reinsurance

In Sevilleja v Marex the Supreme Court narrowed the scope of the reflective loss rule. The recent Privy Council judgment in Primeo Fund (In Official Liquidation) v Bank of Bermuda (Cayman) Ltd & Another [2021] UKPC 22 further clarifies the circumstances under which the rule operates.

Further judicial consideration of the “reflective loss” principle relevant to shareholder claims

In the landmark decision of Sevilleja v Marex last year (discussed in our article here) the Supreme Court narrowed the scope of the reflective loss rule, finding that only shareholders (and not creditors) are prohibited from claiming loss that is merely the consequence of a loss suffered by the company. The recent Privy Council judgment in Primeo Fund (In Official Liquidation) v Bank of Bermuda (Cayman) Ltd & Another [2021] UKPC 22 further clarifies the circumstances under which the rule operates, confirming that assessment of whether the reflective loss rule applied should be determined at the point at which the claimant suffered loss said to be recoverable in law and not at the time proceedings commence. In this case, a fund that directly invested in Madoff’s Ponzi scheme did not lose its right to claim against the fund custodian and administrator as a result of its later indirect investment as a shareholder of two feeder funds.  

While decisions of the Privy Council are not binding on the English Courts, they are influential and so it is likely this case will be considered the next time this issue arises in this jurisdiction.


Primeo Fund (“Primeo”), a Cayman Islands company, appealed against a Court of Appeal decision that it was prevented from pursuing claims against the respondents (“R1” and “R2”), who were Primeo’s custodians and administrators, as a result of the reflective loss rule.

From Primeo’s inception, it had placed a proportion of its funds directly with Bernard L Madoff Investment Securities LLC (“BLMIS”) for investment. Primeo also, later, invested funds it received from clients indirectly with BLMIS through buying shares in two feeder funds to BLMIS, namely, Herald Fund SPC (“Herald”) and Alpha Prime Fund Limited (“Alpha”).  

Over time, Primeo increased its direct investment in BLMIS. This was until May 2007, when its direct investments with BLMIS were transferred to Herald in consideration for new shares in Herald (the “Herald transfer”). Herald continued to employ R2 as custodian and administrator. From this point onwards, Primeo no longer had any direct investments with BLMIS; its investments in BLMIS were only indirect through Herald and Alpha.

As it later transpired, BLMIS was the vehicle through which Madoff had operated his Ponzi scheme. Primeo suffered heavy losses and was, accordingly, placed into liquidation when Madoff’s fraud was uncovered.

Primeo subsequently initiated proceedings against R1 and R2 alleging breaches of obligations and duties, including under their administration and custodian agreements. Primeo claimed that the breaches caused it to suffer loss as well as the loss of its chance to withdraw investments from BLMIS.

At first instance, R1 and R2 were found to have breached duties owed to Primeo, but Primeo’s claims were dismissed for having infringed the reflective loss rule. Primeo’s subsequent appeal was also dismissed and the rule was again found to have been infringed, on the basis that, by the time Primeo brought claims against R1 and R2, it was a shareholder in Herald. Had Herald then successfully brought claims against R2, that would have restored the value of the shares in Herald held by Primeo.

Thus, the key question to be determined by the Board of the Privy Council (the “Board”) at this appeal was whether the reflective loss rule should operate to bar Primeo from pursuing R1 and R2.


Primeo’s appeal was allowed. The judgment, given jointly by Lord Kitchin and Lord Sales, held that the reflective loss rule had no application in this case in barring Primeo from claiming for losses it suffered: i) each time it directly invested with BLMIS; and ii) by loss of chance to redeem its BLMIS investments up until the date of the Herald Transfer.

In so finding, the Board identified five issues, of which we consider two particularly, referred to in the decision as the “timing issue” and the “common wrongdoer issue”.

The timing issue

In relation to the timing issue, the Board determined that Primeo did not claim for losses suffered at a time when Primeo was a shareholder of Herald or that are “merely” the result of loss suffered by Herald. While the Board recognised that, via the Herald Transfer, Herald had acquired a right of action against R2 that could potentially restore the value of the losses that Primeo suffered, this fact was in itself insufficient to bring the reflective loss rule into operation. The Board reasoned that, any losses Herald claims to have suffered, are not the same as the losses of Primeo.  

As a matter of law, up until the Herald Transfer, every time Primeo directly invested in BLMIS and thus had its funds misappropriated, it could and would have had a cause of action against R1 and R2 for breach of duty. Further, every time Primeo made such direct investments in BLMIS, it had not been subject to any agreement to “follow the fortunes” of Herald or any company. In particular, absent any specific agreement, on becoming a shareholder in a company, a shareholder is agreeing to “follow the fortunes” only on a forwards-looking basis – there is no agreement to “follow the fortunes” in respect of matters arising prior to becoming a shareholder. Similarly, the claim for loss of opportunity to disinvest from BLMIS is but Primeo seeking redress for the loss it suffered in a personal capacity at a time before it was a shareholder in Herald.

Thus, at the time of the Herald Transfer, Primeo actually had two choses in action, comprising: (i) its rights in the BLMIS investments at the time; and (ii) its (then-potential) claims against R1 and R2. There had not been any reference made to (ii) at the time of the Herald Transfer and it could not be inferred that Primeo agreed to abandon its right to those claims.  

The Board accepted that, via the Herald Transfer, Primeo exchanged a direct exposure to loss with an indirect exposure to the same loss. If Primeo were able to receive any value through Herald in relation to those investments, then Primeo would only have to give credit accordingly, as per the ordinary principles on damages. This is fundamentally different from saying that Primeo suffered no loss at all by virtue of its shareholding in Herald.

The Board confirmed that the reflective loss rule is one of substance, not procedure: it operates to bar shareholders’ claims that are not “separate and distinct” from those of the company, and crucially, its application should be tested at the point where the relevant loss is suffered by the shareholder, not at whatever time proceedings are issued - otherwise, there could be “very odd results” undermining the rule. In this regard, the decision considered and departed from the Court of Appeal case of Nectrus Ltd v UCP Plc [2021] EWCA 57. It cannot be the case, for example, that a shareholder who suffers loss by virtue of a diminution in value in his shareholding, could seek to recover that loss against the wrongdoer (against whom the company also has an action) by selling his shareholding and ceasing to be a member of the company. It also cannot be the case that a shareholder should be allowed to recover if it simply acts faster than the company in initiating proceedings.

The common wrongdoer issue

In relation to the common wrongdoer issue, it was held (in line with Marex and the earlier case of Prudential Assurance Co Ltd v Newman Industries Ltd [1982] Ch. 204) that the rule against reflective loss applied only in circumstances where the shareholder and the company had a cause of action against the same wrongdoer. On the facts, neither Herald nor Alpha had a claim against R1 as a former administrator to Primeo, and neither did Alpha have a claim against R2. Although the administrator, R1, had an “onward” claim against R2 in respect of any liability that R1 had to Primeo, R2 was not a common wrongdoer as regards Primeo and Herald/Alpha; to assume that such onward claims would be brought would be an extension of the reflective loss rule that could result in injustice.


This decision highlights judicial unwillingness to expand the reflective loss rule beyond the narrow circumstances under which it operates. It helpfully clarifies an open point (i.e. that the claimant’s status should be assessed at the time at which the claimant suffered loss said to be recoverable in law rather than the time at which a claim is made) and confirms another (i.e. that the rule against reflective loss will only apply where the company and the shareholder have the same cause of action against the same wrongdoer).

In coming to this decision, the Board considered the purpose of the rule against the backdrop of established company law principles. While the shareholder shall “follow the fortunes” of the company, and the company has the right to decide whether claims should be brought in respect of any wrongs done to it, this decision confirmed that the rule will not be expanded to preclude a new shareholder from enforcing rights of action that had already accrued to them before they became a shareholder of the company.


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